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The Central Bank of Nigeria’s Monetary Policy Committee (MPC) held its 4th meeting this Year on Monday, the 25th and Tuesday the 26th of July, 2016.

The session was held in the shadow of a rapidly worsening economic environment, a dramatic fall in the value of the domestic currency which fell below the N300 to the dollar mark at the interbank exchange: inflation reached 16.5% in June and a contraction in our domestic output leading to a fall GDR Considering the CBN’s rernit for price stability, these developments present a significant challenge.

The MPC had two primary issues to decide on during its 2 day meeting. How to reduce the inflation rate, thereby maintaining price stability and how to reverse the contracting economic output, thereby reigniting economic growth.
After due consideration, the MPC decided to focus on price stability and inflation rather than economic growth largely because they feel they have less of an ability to influence economic growth. The MPC agreed as follows:

To increase the Monetary Policy Rate to 14% from 12%

To retain the cash reserve ratio at 22.5%, liquidity ratio at 30%, and the asymmetric window at + 200 and – 500 basis points around the MPR.

Implications of Decision for SMEs

The Central Bank decided to focus on inflation which is growing faster than they expect. SME’s stand to gain two things from this stance. If the CBN intervention works and Inflation trends down. Nigerians will have a higher purchasing power and therefore SME’s will be able to sell more goods or services. In addition, operating cost of SMEs will trend down meaning they can offer goods and services at the lower prices. Conversely, if the CBN’s efforts are not sufficient to arrest inflation, prices and cost will keep growing and businesses in the SME space will continue to be badly squeezed.

The increase in MPR will make it more expensive for SME’s to borrow from banks thereby further reducing access to finance even when they meet credit requirements. Banks might also need to renegotiate existing loans thereby further reducing margins for SMEs. This implies that growth projects might need to be put on hold for now or SME’s will have to explore alternatives to access low cost funds while finding innovative ways to keep costs down.

One of the things that was clear from the MPC session is that the CBN is still counting on its forex policy to work and is obviously willing to give it time to do so. While there is a negative impact on SMEs from the loss of value of the naira. the relative price stability that would come from a stable foreign exchange rate and available forex is an advantage for SME’s as it allows for longer term planning.

Conclusion

The MPC is focused on bringing inflation down which will be good for SMEs and the average Nigerian. It is expected that the Federal Government will complement this effort by using its control over fiscal policies to reverse the fall in domestic output through the speedy implementation of the budget as well as improve consumer spend by ensuring the full payment of workers’ salaries. To guard against market share erosion, SMEs need to be closer to their customers to understand their needs and price thresholds so as to curtail business losses.